House of Representatives- Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008

As a nation we sometimes face challenges and crises, the causes of which are beyond our control but the solutions to which lie within our reach. In these present testing times, Australia is exposed to the turbulence in the global financial system. It is the responsibility of the government to ensure that Australian families and businesses are protected from this turbulence, and that is exactly what this government is doing. We are acting decisively to safeguard our financial system, to secure the savings and the livelihoods of Australians and to strengthen Australia’s position as we move through this dire financial crisis.

As a nation we sometimes face challenges and crises, the causes of which are beyond our control but the solutions to which lie within our reach. In these present testing times, Australia is exposed to the turbulence in the global financial system. It is the responsibility of the government to ensure that Australian families and businesses are protected from this turbulence, and that is exactly what this government is doing. We are acting decisively to safeguard our financial system, to secure the savings and the livelihoods of Australians and to strengthen Australia’s position as we move through this dire financial crisis.

The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008 and cognate bills before the House introduce measures to implement the announcement made by the Prime Minister on 12 October. The bills establish the Financial Claims Scheme that will give certainty to depositors. The government has moved to guarantee all deposits of authorised deposit-taking institutions—that is, Australian banks, building societies and credit unions and Australian subsidiaries of foreign owned banks—for the next three years. In addition, the government will guarantee wholesale term funding of Australian banks and other authorised deposit-taking institutions. Given the difficulties in the interbank funding market that have arisen as a result of an increased aversion to risk, and the consequential tightening of lending practices, this move will allow Australian institutions to continue to raise funds overseas to support their operations.

The financial stability package announced by the Prime Minister on 12 October and the Economic Security Strategy announced by the Prime Minister on 14 October are a timely and appropriate response to the unfolding global crisis. The foundations of this crisis are complex. They arose in the context of unusually low real interest rates and high liquidity that resulted in a decrease in the pricing of risk and a resultant willingness on the part of participants in financial markets to take on increased levels of risk and leverage. In addition, financial innovation led to the increased use of newer forms of financial instruments without the capacity to appropriately price risk associated with those instruments. What began as, in the words of the International Monetary Fund, a ‘generally orderly repricing of risk for assets linked to US subprime mortgages’ has turned into a global maelstrom. This is a market correction that has transformed into a global crisis. There are serious implications for the stability of Australia’s financial system and, in turn, for our real economy and the savings and livelihoods of all Australian households and businesses.

Around the world, more than 25 banks have failed or come close to failure and collapse, requiring government bailouts or mergers with other financial institutions. Understandably, there has been growing anxiety among Australian families and businesses that such an event may occur here. The Australian government has now said that, should such an event occur, however unlikely that is, it will guarantee the savings of those families and businesses caught up in such an event. This move is critical to maintaining confidence and therefore stability across our entire financial system. Australian depositors can now feel certain that their deposits are safe.

The reaction of banks to the global financial crisis has understandably been to tighten lending standards and increase the cost of capital. This has implications for the entire financial system as well as for households and businesses seeking to borrow to finance investment. In the current climate, it has become increasingly difficult for banks to raise funds in the interbank funding market. Governments around the world have reacted to the increased anxiety and what the International Monetary Fund has described as ‘an evaporation of trust’ by intervening in financial markets in a way that would have seemed unimaginable a year ago.

Four European governments have guaranteed 100 per cent of eligible deposits and other countries have substantially increased their deposit insurance caps. These reactions have required the Australian government to move to secure our banks. Australia’s banking system continues to show its resilience despite the threats posed by events beyond our shores. Our financial system remains sound and is amongst the best regulated, safest and strongest in the world. In the words of the Organisation for Economic Cooperation and Development, Australia’s ‘financial sector has withstood the crisis thanks to prudent management, high profitability and strong capitalisation’. However, as the Prime Minister said on 12 October:

We must act now because other governments with weaker banks have moved to make those institutions more competitive than our stronger banks.

That is why the government has acted to guarantee wholesale term funding of Australian banks. To ensure the continued competitiveness of Australia’s mortgage markets, the Australian government is directing the Australian Office of Financial Management to purchase an additional $4 billion in residential mortgage backed securities from those lenders who are not authorised deposit-taking institutions. This decision has been made after close monitoring of the mortgage market and careful consideration by the government. Through the tightening of credit availability, there is the very real potential that this global financial crisis will have an impact on our real economy. The restoration of stability and liquidity to financial markets is therefore of paramount importance.

This crisis is likely to result in a further slowing of global economic growth, in particular in advanced economies. Although we are better positioned to weather this economic storm than many other countries, these times do require a strong response and strong leadership. Because of this government’s prudent financial management in this year’s budget, Australia now has the flexibility to respond to this growing crisis with a range of measures.

The Economic Security Strategy announced by the Prime Minister yesterday will both stimulate the domestic economy and protect all Australians through these difficult times. We are now in a position to protect those in our community who are doing it tough: working families, pensioners and small businesses. The government have delivered relief for pensioners, carers and people with a disability through lump sum payments in the lead-up to comprehensive reform of the pension system. We have been able to provide additional support for first home buyers and to stimulate the residential construction industry. We are continuing to pursue long-term capacity-building measures in our economy by creating an additional 56,000 new training places and fast-tracking the three national building funds that were established in this year’s budget.

Through the measures contained in this legislation, and through the Economic Security Strategy, we are acting decisively, calmly and in a timely fashion to ensure that Australians are protected through this global financial crisis. It is critical that the opposition also acts in the best interests of all Australians. This government is continuing its responsible, sound economic management to guarantee the continued stability of our financial system and to protect Australian households and businesses. I commend the bills to the House.